Apple Crushes Amazon as Stock to Own

Amazon(AMZN) and Apple(AAPL) recently reported numbers that not only beat, but far exceeded the expectations of all but the biggest bulls.

Both companies reported higher top and bottom lines, and both trade for over $200 per share. There are many other similarities, for example, both sell digital content and the hardware to consume digital content. Both sell third-party content as well. Both companies have a worldwide marketing footprint and are household names. Amazon and Apple have the resources available to dominate most spaces they wish to enter.

However, the similarities end quickly once you lay financial pages next to each other. Apple is more than five times more valuable by market cap than Amazon. Amazon is a more stable stock by any standard and especially as a member of the technology space. Currently, neither company pays a dividend, but Apple will soon begin sharing the war chest of cash with investors.

Keep in mind that both companies just reported what was received as "strong" earnings, but in the last 12 months Apple produced $41 in earnings per share, while Amazon made $1.37. Apple's profit was 30 times greater than Amazon. If you bought one share of Apple and your neighbor bought one share of Amazon, you can take your neighbor to lunch and he can't even take care of the tip.

To be fair, I need to point out the shares are not priced equally. Apple trades for about $600 a share while Amazon trades at a much lower price of $220. To make the comparisons easy, we look towards the price-earnings ratio to get a relative comparison. Amazon's share price is 160 times earnings trailing 12-month earnings, while Apple trades at 15 times earnings. Generally speaking, a lower P-E is better. I have an opinion on P-E ratios I will get to in a moment.

Looking at past results is great for knowing where we have been, but if we want to see where we are going we need to take out the crystal ball and try our best to predict the future. As both companies clearly demonstrated, analysts' crystal balls where anything but clear. This is fine with a comparison between Apple and Amazon because the differences are so extremely far apart we can allow for plenty of wiggle room.

Analysts are expecting Amazon's next fiscal year earnings to result in a P-E ratio of about 87, while Apple's forward P-E is priced about 11. Both companies are heavily followed with many analysts reporting various expectations. When I select earnings I try to select what I consider the most reasonable numbers rather than just simply pulling the mean number. We can then expect every dollar of income for Amazon to cost 8 times more than what it will cost for a dollar in income for Apple. If you cut Apple's income in half and double Amazon's income, Apple will still be half as expensive for every dollar in earnings in comparison to Amazon. Simply put, there is no comparison between the two using a P-E ratio as the measurement. All else being equal, one would have to be a fool to buy Amazon instead of Apple based on P-E ratios.

Just a little more light on P-E ratios and we will move to other measurements. Historically, it is my experience that companies trading over a P-E of 20 are not only expensive, but by expensive I mean your investment is likely to lose money or at a minimum not perform as well as the overall market over time.

Looking at the moving averages of both Apple and Amazon, we can see Apple shareholders are happy and Amazon shareholders are not as happy. Shares of Apple are trending nicely above the shorter 60-day moving average, which in turn is nicely above the key 200-day moving average. For trend followers this is exactly what you want to see.

To me, the chart for Amazon paints a picture much closer to reality than the P-E ratio does. In the last year, Amazon's stock is unremarkable and largely trading near the moving averages. This can be expected given the beta at 0.69 is so far under the overall market (a beta of 1 is equal to the volatility of the overall market, over 1 is more volatile and under 1 is less volatile).

Why did Amazon move up so much after earnings? The answer is simple: Expectations were so low with Amazon that when they beat estimates, there was bound to be a combination of late arrivals to the party and short covering. Often with earnings it's not a matter of how much a company makes, but how well they do compared to estimates and expectations.

There are other reasons to like Apple compared to Amazon like cash per share, growth rates and barriers to entry, but in the end what we really want as investors is to make a return over and above the Treasury bond rate in return for the risk of loss we take. If you want to be in technology, it's hard to make an argument in favor of buying Amazon with its dotcom bubble stock price. Do yourself a favor and don't get caught holding shares in Amazon if the bubble pops.